Analysis of the 2005-06 Budget Bill

Legislative Analyst's Office
February 2005

Established by Chapter 867, Statutes of 1997 (SB 8, Lockyer), the
California Gambling Control Commission (1) monitors and enforces the terms of
tribal-state gambling compacts (including the administration and distribution
of funds received by the state as a result of Indian gambling activities), (2)
licenses and regulates card rooms, and (3) provides oversight for
specified aspects of horse track betting. The five-member commission is
appointed by the Governor.

The Governor's budget proposes $13.2 million in expenditures
($10.9 million from the Indian Gaming Special Distribution Fund, and
$2.3 million from the Gambling Control Fund) and 89 positions for support
of the commission and its activities.

We recommend that the Legislature reject a proposal for
$4.8 million and 46 positions (two-year limited-term) for increased
regulatory activities related to tribal gambling. Instead, we recommend that
the administration resubmit a request which distinguishes between resources for
workload under the 1999 and 2004 compacts, provides justification for a state
testing lab, and considers the role of the Department of Justice in regulating
tribal gambling. (Reduce Item 0855-001-0367 by $4.7 million and Item
0855-001-0567 by $124,000.)

Gambling on Tribal Lands. Indian tribes with tribal-state
gambling compacts can operate slot machines and certain other casino-style
gambling in California. Currently, 66 tribes have compacts and operate about
56,000 slot machines.

1999 Compacts. Most tribes signed their current compacts in
1999. Under these compacts, a tribe may operate up to two facilities and up to
a total of 2,000 slot machines. In exchange, tribes make some payments to the
state, which can only be used for specified purposes. The payments are made
into two funds, the Revenue Sharing Trust Fund (RSTF) and the Special
Distribution Fund (SDF). These compacts expire in 2020.

2004 Compacts. In June 2004, five tribes signed amendments to
their compacts and these agreements were approved by the state. Under the
amended compacts, the tribes may operate as many slot machines as they desire.
In exchange, these tribes provide a combined $100 million payment annually
to the state. The state plans to issue a bond backed by these revenues to repay
a transportation loan obligation. The tribes provide additional payments to the
General Fund for slot machines added to their facilities. These compacts expire
in 2030, ten years later than the 1999 compacts. In addition, in August 2004,
two tribes signed new compacts and two additional tribes amended their existing
compacts. Under the provisions of these compacts, the tribes generally make
payments to the state based on the "net win" of their slot machines.
These agreements expire in 2025 or 2030. The Governor's budget assumes
$34 million in 2005-06 General Fund revenues from the 2004 agreements.

State Agencies That Regulate Tribal Gambling. The commission
and the Division of Gambling Control within the Department of Justice (DOJ) are
the state's tribal gambling regulatory entities. The DOJ conducts background
investigations for the commission on gambling licenses and work permit
applications received by the commission. The DOJ reports that a substantial
portion of its tribal law enforcement resources are spent on criminal
investigations—including those involving cheating, illegal games, and illegal
slot machines. The commission monitors and enforces the terms of tribal-state
gaming compacts, including the administration and distribution of funds
received by the state as a result of tribal gaming activities.

The administration proposes to increase the commission's budget by
$4.8 million and 46 two-year, limited-term positions, which would result
in a doubling of its current staff. Specifically, the commission requests:

15 auditors (which would
result in a tripling of their current auditing staff) to audit financial
records of the tribes to ensure that appropriate levels of payments are
being remitted to the state.

13 state gaming testing lab
and field-testing staff to test slot machines and gaming software to
ensure that they are operating to acceptable standards.

Nine licensing and
investigative staff to review licenses for key employees and vendors
associated with tribal gambling and to interface with law enforcement.

We have several concerns with the administration's proposal, which are
discussed below.

Not Clear What Problems Being Addressed. Even though the
proposal is a major expansion of the commission that would result in a doubling
of its size, the administration has provided little justification as to what
problems would be addressed. The commission staff report that the proposal only
funds activities required under the 2004 compacts. Our review, however, reveals
that some of the request is for workload required under the 1999 compacts. For
instance, the request includes seven auditing positions to conduct audits of
payments made into the SDF. Payments are required to the SDF under the 1999
compacts, not the 2004 compacts. In reviewing the request, the Legislature
needs to be able to distinguish any funding which augments existing activities
from those new activities.

Assumptions Unclear. In addition, the commission was unable to
provide information on the assumed level of growth in gambling in the state,
which should form the basis of anticipated workload. Without these assumptions,
it is difficult to evaluate the reasonableness of the requested resources.

Gaming Testing Lab Not Required. The request for 13 positions
for the state gaming testing lab would commit significant state funds to an
activity not required under the provisions of the compacts. The 2004 compacts
require that games—prior to being operated in a casino—be tested by ei ther an
independent lab or a gaming testing lab operated by the state. Currently, new
machines put into operation under the 2004 compacts are being tested by
independent labs. To the extent that the state funds and operates a gaming test
lab, there are no guarantees that the tribes and machine manufacturers would
choose to utilize it. The commission notes some possible state advantages to a
state lab, such as increased state expertise and control. The commission,
however, has not fully explored the fiscal implications of developing such a
lab. For instance, the proposal does not consider the possibility of minimal
workload.

Poor Output From Existing Audit Staff. Currently, the
commission conducts two main types of audits. One of the audits requires that
staff count the machines in operation at a facility to ensure that the tribe is
complying with the compact provisions related to the RSTF. The other is a
financial audit to ensure that the tribe is complying with the provisions
related to the payments to the SDF. The SDF compliance audits require that the
commission verify that the tribe is paying a designated share of its net win.
The requested additional audit positions would focus on these types of
financial audits for payments to the SDF and the General Fund. Since the
implementation of the 1999 compacts, the commission has completed only one
financial audit of the payments made to the SDF. (The commission does note that
five additional audits are underway.) Given this limited financial audit
productivity from existing staff, it is difficult to determine whether
additional resources would be used effectively.

Duplicative Activities Between the DOJ and the Commission. Based
on our review, it appears that efficiencies could be achieved by better
coordinating at least some of the activities of the DOJ and the commission. For
example, the commission's audits to ensure compliance with the provisions
related to RSTF payments require staff to count the number of machines in
operation at the facilities. The DOJ reports that its compliance and
enforcement personnel also count gaming devices to ensure the totals are within
the limits specified by the compacts. These duplicative efforts result in an
inefficient use of state gambling regulatory resources. Commission and DOJ
staff report that there have been some past efforts to collaborate in
conducting such audits. Both staffs report these collaborations were successful
and helped maximize staff resources. Yet, continuing or expanding the efforts
to collaborate with DOJ does not appear to have been considered in the
development of the current proposal.

2004 Compacts Require Additional Resources. It is reasonable
to expect that some level of additional commission resources is needed given
the recent agreements with the tribes. These revised agreements have already
resulted in an increase in the number of slot machines in operation. Moreover,
required payments under the compacts directly affect the state's General Fund
condition.

Recommend Resubmittal of Request. Given the current level of
information available, however, we are unable to determine what level of
resources are reasonable. Consequently, we recommend that the Legislature not
approve the administration's current request. Instead, the administration
should resubmit a request that includes the following:

Which Workload Is Being
Addressed?The request should specifywhat resources are
intended to address workload under the 1999 compacts versus the 2004
compacts.

Justify a State Gaming
Testing Lab. The request should justify the need for a state
gaming testing lab and explain how it would further the state's ability to
regulate tribal gaming. The administration in developing the request
should explore whether the costs of the lab could be funded from
reimbursements from the manufacturers of slot machines.

Reflect Strategy That
Considers DOJ and the Commission. The request should reflect a
strategic plan to regulate tribal gambling in the state, which clearly
delineates areas of responsibilities and provides for appropriate
coordination between DOJ and the commission.